Don’t Regulate Facebook — That’s What Zuckerberg Wants

If Facebook disappeared forever this afternoon, I wouldn’t exactly be upset about it. I’m astounded when I see people post loads of personal information on the site, including posts about all their travel plans, their shopping habits, their daily routines, and their family members. Long is the list of people who have been harassed by law enforcement agencies or “child welfare” agencies in response to something they said or did on Facebook. And, given what we know about Big Tech’s willingness to collaborate with government agencies, people who are fond of posting their every move in Facebook might as well hand over their daily itineraries to the FBI.

Similar problems exist with other tech platforms as well, from Twitter to Google.

However, there is a fairly easy way to minimize the amount of information Facebook and other platforms collect on the user. The user can stop using the platform, or at least stop using it so often. Unlike the state, which is free to mandate that people use their “services,” consumers are still free to not use Facebook.

Also, it is still the case that producers are free to create new firms that will compete with Facebook. And many have done so. Recent data suggests that Facebook users are spending less time on Facebook, and younger users are preferring to spend their time elsewhere. Facebook is expected to actually lose users in the under-25 category this year. Some will keep using Facebook-owned Instagram, but many will go to services not owned by Facebook, such as Snapchat.

For whatever reason, whether it’s increased competition or a decline in social media use overall, Facebook is not bulletproof, and it is facing competition from others. True, none of Facebook’s competitors are just like Facebook. But that’s how competition works. Other firms offer a choice for consumers, and offer different products.

After all, we’ve already seen firms like Facebook be beat by competition in the past. Remember MySpace? It was once bigger than Facebook. And now it’s not.

If consumers want to use social media platforms that aren’t Facebook, and which offer different choices, the answer lies in greater competition. But, if greater competition is what we want, barriers to entry must be kept low, government regulations must be abolished or minimized, and consumers must be free to use or not use firms as they please. So long as this is the case, Facebook will never have a true monopoly. Consumer preferences can always change. And sometimes they change drastically.

Get Ready for More Regulation

Unfortunately, this week’s Congressional hearings with Facebook founder Mark Zuckerberg suggest that things are going in a direction that will only end with increasing whatever monopoly power Facebook currently has. Washington politicians are interested in regulating the social media world, and ultimately, this will only strengthen the big firms that dominate the industry now — while making things harder for smaller start-ups and future competitors.

Oh sure, politicians are making a big show of how concerned they are about everyone’s privacy, although it is embarrassingly obvious that the elderly and out-of-touch-with-reality members of the Senate have no idea how social media works. The most they could do was read questions written for them by staff and try to understand Zuckerberg’s answers.

(These people, by the way, will be the ones voting on any future legislation that regulates social media.)

But even if members of Congress had a wonderful grasp of the internet and social media, would anyone benefit from any new regulations on the industry?

Well, yes, of course some people would benefit. Those who would benefit include the government agents who will get jobs as regulators, the politicians who can score political points for passing new legislation, and the large incumbent firms that now dominate the social-media market.

Facebook chief executive Mark Zuckerberg said on Wednesday that he’s open to having his company be regulated.

“Actually, I’m not sure we shouldn’t be regulated,” Zuckerberg said in an interview…I actually think the question is more ‘What is the right regulation?’ rather than ‘Yes or no, should it be regulated?’” Zuckerberg told CNN.

But why so open to regulation? Zuckerberg cleared this up himself in one of his answers to questions from members of Congress:

I think a lot of times regulation puts in place rules that a large company like ours can easily comply with but that small start-ups can’t,” Zuckerberg said as he testified for the second consecutive day on Capitol Hill.

Indeed.

Government regulations such as minimum wages and financial mandates are especially burdensome on small firms because small firms have less access to capital and enjoy fewer benefits of economies of scale.

It’s far easier for a firm like Walmart, for instance, to pay higher wages than for a small start-up. And, should the economy fall on hard times, higher costs can be weathered better by large firms that can borrow large amounts to get through a crisis. Small firms have far less borrowing power.

One example of this can be seen in the decline of small banks in the wake of the new banking regulations found in the Dodd-Frank legislation. Compliance costs created by the new legislation have led to fewer small firms, fewer start-ups, and fewer community banks. Huge financial institutions have benefited greatly from additional legislation. Market share for small firms, meanwhile, is being destroyed.

These barriers to both entry and survival for small firms, end up destroying competition. Per Bylund notes:

Regulated markets are different from open, free markets in that they have artificial barriers to entry: they redistribute costs of business to protect some incumbent firms by forcing the cost on (some) entrants. In other words, there are fewer new businesses and thus less competition.

Moreover, this decline in competition then means that the surviving large firms can afford to be less responsive to the desires of consumers. Efforts to reduce prices also fall by the wayside and competition wanes. Bylund continues:

Under interventionism, businesses do not always need to discover accurate consumer prices because the threat from new entrepreneurs entering the market is smaller than it otherwise would have been.

In other words, government regulations diminish consumer sovereignty by reducing both competition and thus the incentive to stay in tuned with what consumers want.

Dominant Firms Control the Regulators

The other great danger in regulation exists in the fact that regulatory bodies have a tendency to be taken over by the large dominant firms themselves.

This is a common occurrence in regulatory schemes and is known as “regulatory capture.” When new regulatory bodies are created to regulate firms like Facebook and other dominant firms, the institutions with the most at stake in a regulatory agency’s decisions end up controlling the agencies themselves. We see this all the time in the revolving door between legislators, regulators, and lobbyists. And you can also be sure that once this happens, the industry will close itself off to new innovative firms seeking to enter the marketplace. The regulatory agencies will ensure the health of the status quo providers at the cost of new entrepreneurs and new competitors.

Moreover, as economist Douglass North noted, regulatory regimes do not improve efficiency, but serve the interests of those with political power: “Institutions are not necessarily or even usually created to be socially efficient; rather they, or at least the formal rules, are created to serve the interests of those with the bargaining power to create new rules.”

After all, how much incentive does the average person have in monitoring new regulations, staying in touch with regulators, and attempting to affect the regulatory process? The incentive is almost zero. The incentive for regulated firms, on the other hand, is quite large.

So, once Congress begins its process of regulating social media firms, you can be sure that Facebook and the other major firms involved will be at the table, and will be key in writing the legislation, and in guiding it through the legislative process. And why wouldn’t they be allowed to be closely involved? As The Verge has already shown, Facebook freely writes checks to members of Congress as “political donations.” And once the new regulatory bodies have been created, Facebook will be involved every step of the way, from selecting regulators, to writing new regulatory rules.

Needless to say, it won’t exactly be a priority for Facebook to make sure that start-ups and other small firms get a fair shake at slicing off a piece of Facebook’s market share.

Mark Zuckerberg isn’t pandering when he says that he welcomes new regulations from Congress. He doesn’t want Facebook to end up like MySpace, and new regulations are among the easiest ways to crush the competition.